Selling a property when you have tenants in place can be a complicated process. Here’s what you need to do to ensure that the sale goes as smoothly as possible.
Selling a tenanted property often makes financial sense for investors. Not only do you need to sell at the time that’s right for you in terms of the highest possible sale price, but continuing to receive rental income right up until the property sells can make a huge difference to your bottom line and ensure that you stay on top of investment loan repayments. It’s also appealing to potential investors if a property already has tenants in it.
Unfortunately it can also be tricky business. There are inspections to organise around your tenants, potential complications regarding lease agreements and even the risk of driving away potential buyers.
Read on to discover the ins and outs of selling an investment property while you have tenants occupying your asset.
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Things to consider when selling a tenanted property
- Notify your tenants. Before you begin the sales process, notify your tenants that you intend to sell the property. You’ll need to tell the tenants once you have reached an agreement with a buyer as well, so make sure you’re aware of the relevant notification periods that apply in your state or territory. In some states, such as NSW, unless you notify the tenants of your intention to sell when they sign the lease, your decision to sell gives the tenants the right to break that lease.
- House viewings and inspections. In most Australian states, the law stipulates that tenants need written notice at least 24 hours before the property will be shown to a potential buyer. Although it’s common courtesy for tenants to head out for a little while when an inspection is taking place, there’s no official requirement for them to do so.
- Asking your tenants to leave. If your tenants are on a fixed lease, you cannot ask them to vacate your property unless they break the terms of the lease. You can ask them to leave if they’re on a periodic lease agreement, so check with the tenancy authority in your state or territory about appropriate notification times. For example, tenants on periodic agreements in Queensland must be given at least four weeks’ notice from the date of the contract of sale to vacate the property.
- Less control for you. If a property is tenanted, you have less control over how the property will be presented to potential buyers. While most tenants generally do the right thing and ensure that the property is in a reasonable state for inspections, simple oversights such as an unmown lawn or the lingering smell of last night’s dinner can have an impact on potential buyers. In fact, bad tenants could drive your sale price down significantly, so make sure to factor this element into your calculations.
- Not all buyers want a tenanted property. If you’re selling a property with tenants on a long-term lease, you may drive away buyers who are looking for an owner-occupied home. Buyers looking for a home to move into straight away are highly unlikely to want to wait months for the lease to expire and the tenants to get out, so you may lose a portion of the market as soon as your property is listed. On the other hand, some properties are more likely to attract investors, and having trustworthy tenants already in place can be a big selling point.
- Keeping tenants in place provides income. While selling an untenanted home may be easier in many ways, don’t forget that your tenants also provide a crucial source of income for you. For example, if your property takes three months to sell and then you need to wait another couple of months before it is transferred to the new owner, you could spend a total of five months without any rental income.
How can I look after my existing tenants?
The ongoing rental income your tenants provide makes them a valuable asset. Ensuring that you still have cash coming in while you wait to make a sale is important to the stability of your overall finances, especially if you need to make mortgage repayments.
There are other benefits as well. For many investors, purchasing a property that already has reliable tenants in place can be enough to get a sale over the line. Then there’s the fact that good tenants can help you get a better price for your property by tidying up before open houses and presenting your property in the best available light.
So how can you do the right thing by your tenants? For starters, make sure that you comply with all the necessary regulations by notifying them of your intention to sell and of a completed sale. Giving advance notice will be appreciated by renters.
Next, consider the possibility of offering the tenant a rent reduction for the duration of the sale period to compensate for the inconvenience. Skimming $50 or $100 off the weekly rent in return for the tenants presenting the property as nicely as possible for viewings — not to mention staying out of the way when those viewings take place — is often a very good deal for both parties. Alternatively, offering a week’s free rent following the sale of the property can also be an attractive prospect.
Finally, it’s worth remembering that the sales process is stressful not only for you but also for your tenants. Make sure that your real estate agent or property manager takes all the necessary steps to keep the tenants happy. If you want them to stay in place, co-operating with them and proactively attempting to do the right thing by them is the best approach.
Julie sells her investment property
After six years as the owner of a four-bedroom investment property in Brisbane’s northern suburbs, Julie has decided it’s time to take advantage of rising property prices and sell her asset. The tenants in the property, a couple with two young children, have been in place for three years and still have six months remaining on their current lease.
The tenants are happy where they are and Julie would love for them to stay — not only do they provide ongoing rental income for her, they also take good care of the property. As the house is located in a popular suburb for investment buyers, Julie decides to take steps to encourage the tenants to stay in place.
Working through her property manager, Julie goes out of her way to get her tenants ready. She lowers their weekly rent and also offers a week’s free rent to sweeten the deal. In return, the tenants make extra effort to keep the property clean and well-presented for every open-house inspection.
As a result, Julie is able to sell the house to another investor for an impressive price and continue receiving rental income right up until the day she hands over the keys. As for the tenants, they receive a rent reduction for a few months during the sale period and then enter into a new lease agreement with the new property owner.